BPO in China: Good to Grow

2008-01-29 Source：Global Service

The IT outsourcing legacy of China has given the country's BPO industry a sound base to start from

By Sridhar Vedala and Vibhash Ranjan, EquaTerra

Ever since China embarked on the journey to bolster its services industry, the focus has been on providing IT services to the domestic and international outsourcing market. The Business Process Outsourcing (BPO) industry, on the other hand, was until recently largely neglected. But now the trend seems to be changing — the BPO market has grown from $900 million in 2005 to about $1.3 billion in 2007.

Moreover, the spread of Chinese locations providing BPO services, too, has increased dramatically in the recent past. Prior to 2005, the majority of BPO activity was restricted to the metro cities of Shanghai, Beijing and Guangzhou. More recently, however, new BPO hubs have emerged, Dalian being an important one. Because of the cultural and geographical proximity of this northern Chinese city to Korea and Japan, it has emerged as an important BPO center for servicing corporates from these Far Eastern countries.

In fact, because of language considerations, the BPO landscape in China is quite different from that in other Asian service-provider locations such as the Philippines and India. American and European customers rarely source BPO services from China, and the market is dominated by three types of customers. First, customer companies from Japan, Korea and Hong Kong are the key drivers of BPO business in China. However, most of these companies restrict outsourcing to only low-end services and are focused on cost savings.

Second, multinationals that have large manufacturing operations in China and the Asia-Pacific region, and have substantially grown over the years. These companies are driven to outsource mostly to harmonize and consolidate their processes, scale operations, seek locations with regional linguistic skills, and, of course, to save costs. Some large foreign investors that have thousands of employees in China are DSM (5,000 employees), Danone (15,000 employees), Fuji (5,000 employees) and Akzo Nobel (7,000 employees). For such corporations, it makes sense to outsource to Chinese providers.

Third, domestic Chinese companies that outsource within China. Potentially, the demand from such companies is expected to grow considerably. These companies include state-owned enterprises, government agencies, and private and public enterprises. Traditionally, these companies have never outsourced, but are now starting out. For instance, some Chinese banks have started outsourcing processes such as low-end data processing, information validation and reference checks.

Drivers for BPO Growth

While cost is the primary driver for any outsourcing to take place, China also offers a lot of other facilities, such as low land rentals and favourable banking regulations.

Emerging regional hubs: Following the commitment to the World Trade Organization, the Chinese economy has been experiencing tremendous growth. There is also a trend of many multinationals shifting their Asia-Pacific headquarters to China. Many multinationals are now looking to setting up their shared-services centers in China or outsourcing their processes to local companies. As such companies gain experience in outsourcing, they plan to make China a regional hub for outsourced services.

Domestic companies getting competitive: Many Chinese companies are aggressively expanding their presence globally, and are now seeking to streamline their business processes to offer best-in-class services. They are outsourcing their activities to some global and Chinese BPO service providers.

Consolidation of business units: The growth of many multinationals in China has typically been driven by business units. During the initial phase of market entry, these multinationals focused on growing the business, thus leading to business-unit driven growth. In the process, various business units set up their own processes in order to efficiently run their respective operations. As the volume of revenue generated and the size of operations increased substantially, the need for consolidation of business processes increased. Presently, many companies that have been in existence in China for years are now in the phase of evaluating the consolidation of services.

Banking regulations: More recently, due to the changes in banking regulations in the country, foreign banks are now allowed to offer retail-banking services in China. Many global banks have entered China through partnerships with Chinese banks and have started focusing on improved service levels and cost efficiency. This will spur growth in banking BPO services in the near future.

The Landscape Today
Automation, government, health care, insurance, logistics, retail and telecom are some industry verticals that are currently using BPO services from China. BPO providers in China provide a range of services from order taking, telemarketing, mortgage, call-center services and claims processing (See Table for more).
In this run, various operating models are emerging in China. Many global and Indian providers support the China operations of their customers and supplement their global delivery capabilities with their China resources. There are also many Asia-Pacific regional deals where the provider companies are using China as the main delivery center while supporting customers from other regional delivery centers. The global players make use of service level-based offshore outsourcing, and most of them have been servicing their key customers for the past couple of years as they continue to service them with their standard global delivery model. Not only this, many local deals are also being executed by local providers who provide a range of models from the basic build-operate-transfer model to full outsourced model.

China’s BPO market is concentrated around Dalian as the center, and major cities such as Beijing, Shanghai, Guangzhou, and Shenzhen as the main nodes. The new cities coming up as secondary alternatives include Chengdu, Xi’an, Changchun, Tianjin and Suzhou.

Global MNCs such as Accenture, Dell, SAP and Braxton are among the host of companies that are already running their BPO centers from China’s BPO hub, Dalian. IBM, too, opened its BPO center in Dalian in May ’06, with an initial target to hire 600 people. The number has already crossed 1,000! Indian BPO provider Genpact is another company that has close to 2,500 people in Dalian.

Being the financial capital of China, Shanghai houses most global financial-services companies. All such companies have been present in China for a long time, and now have Shanghai as their hub for contact-center and back-office processing needs. As China headquarters for most global manufacturing companies, Beijing is also a key location for providing BPO services. The majority of voice-based BPO services are provided from cities such as Shenzhen and Guangzhou.

Presence in other alternative locations, in order to mitigate the saturation risk, is coming up as an integral component of the long-term strategy for many key BPO service providers. In line with this strategy, IBM has recently opened a center in Chengdu and Genpact in Changchun. Cities such as Chengdu, Xi’an, Tianjin, Suzhou and Changchun are gaining popularity as companies are looking out for more resources and cost effectiveness. For instance, the labor cost for running a BPO business in Chengdu is about 30 percent lower compared to major cities of Beijing and Shanghai. In addition, the attrition rate in these big cities is more than 30 percent while that in Chengdu is about 5 percent.

ITO Vs. BPOBig global players such as Accenture, Capgemini, Genpact and IBM have mature capabilities in China, and usually focus on functions such as finance and accounting, supply chain management, customer services and marketing. On the other hand, Indian players such as TCS, Infosys and Wipro are very small in terms of their scale of operations.

Chinese service providers can also be categorized in two broad categories: Those with an IT focus (Neusoft, Worksoft, iSoftstone, Freeborders); and the pure-play BPO companies (CDG, 95Teleweb, CompuPacific). The IT-focused Chinese providers largely engage in data-center, contact-center and administrative back-office operations. The pure-play Chinese BPO companies, on the other hand, focus on multilanguage data entry, application processing for insurance and the credit-card industry.

It is expected that the rate of growth for BPO in China will be much faster than IT outsouricng. This can be attributed to the base of customers and capabilities that the relatively new BPO industry has inherited from the IT outsourcing industry. The demand for BPO in China will continue to grow given the burgeoning growth in the region. Moreover, China offers multiple regional-language support to the surrounding customer markets, which set it apart. The service-provider community is slowly realizing the importance of BPO, as many global and regional providers are now ramping up operations and many Chinese IT companies are now offering BPO services. This coupled with extensive government support will enable the BPO industry to grow much faster in the next few years.

Sridhar has spent several years in China, advising companies on sourcing IT and BPO services from there, and is now Director, Global Sourcing at EquaTerra’s London office. Vibhash is a consultant, global sourcing with EquaTerra. He is based in Shanghai and understands the current outsourcing market trends in the Asia-Pac region.